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Helen Halpin Helen Halpin is the Director of the Center for Health and Public Policy Studies and a health policy professor at UC Berkeley's School of Public Health
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"The wrong direction": Health policy expert Helen Halpin decries Bush's Medicare proposal

- The challenge of reforming Medicare, the U.S. federal health insurance program created in 1965 for the elderly, has defeated several U.S. leaders. Now the 43rd president is taking a stab.

On March 4 President George W. Bush unveiled his administration's proposal for modernizing Medicare in a speech to the American Medical Association. His plan offers three versions of Medicare. (Read the White House's proposal.)

  • Option 1 — Traditional Medicare. Government continues to reimburse doctor of the patient's choice, but adds coverage for high out-of-pocket drug costs and a drug-discount card. Low-income participants (income levels are not defined) would receive a $600 per year drug subsidy.
  • Option 2 — Enhanced Medicare. Participants choose from a list of subsidized private-sector plans (including Preferred Provider Organization, or PPO plans) in order to receive comprehensive drug coverage, full coverage of preventive care, and caps on out-of-pocket costs for hospitalization.
  • Option 3 — Medicare Advantage. Participants join a health maintenance organization (HMO)-style plan, which includes drug coverage and results in lower overall costs for members but limits physician choices.

To evaluate the proposed Medicare changes, the NewsCenter turned to a UC Berkeley faculty expert on the subject. Helen Halpin (formerly Helen Halpin Schauffler) is the Director of the Center for Health and Public Policy Studies and a health policy professor at UC Berkeley's School of Public Health. She has testified before Congress and the California state legislature about reforms for the health care industry, and has developed her own comprehensive health care reform proposal called CHOICE.

What, in your opinion, needs changing about the current Medicare system?

There are two major things wrong with the current system. The biggest and most important is the need for prescription drug coverage. The second is the lack of coverage for long-term care, comprehensive preventive care and protection against catastrophic costs. The last time that the Congress attempted to add coverage for long-term and catastrophic care, the politics played out in such a way that the bill was overturned a year after passage and that issue has not been revisited.

Medicare Fast Facts

Medicare covers more than 35 million Americans ages 65 and older and nearly 6 million younger adults with disabilities.

By 2031, the number of Medicare recipients is predicted to rise to 77 million.

The government's 2002 projections show that currently 24% of Medicare recipients have no prescription drug coverage. The rest have coverage through employer-sponsored health plans (32.9%), Medicaid (12.3%), Medigap (14.8%), Medicare+Choice (10.6%), or other supplemental programs.

Medicare, Medicaid, and Social Security accounted for 42% of all federal spending last year.

To understand where Medicare is today, we need to look at where it came from. When Medicare was created in 1965, it was modeled after the old Blue Cross/Blue Shield employer group plans in effect at that time, which were really created to cover the cost of hospital care, not outpatient care. They originally didn't cover physical exams, preventive services, immunization, or outpatient drugs. Since then, medicine has changed a great deal. However, new benefits, which require the approval of Congress, have been added very gradually to the Medicare program, often just one at a time. The prescription drug benefit has such an enormous cost attached to it that it's been very difficult to figure out how to finance and deliver it in a way that is politically viable.

The Medicare program as it was initially designed meant that everyone over a certain age who had paid into the system and individuals with specific disabilities were all offered health insurance coverage that was the equivalent of what working people had in private plans through their employer. Now, the benefits in private health plans have grown considerably over the last 35 years to keep pace with evidence of medical effectiveness, new technology and an emphasis on prevention, but Medicare has not kept pace with them.

And would the Bush administration's proposal take care of these problems?

Some low-income elderly who choose to stay in the traditional Medicare program [through Option One] would have limited drug coverage and more comprehensive preventive care, but I haven't seen how the income levels are defined for eligibility. Right now, the poorest of the elderly are often dually eligible for both Medicare and Medicaid, which offers comprehensive prescription drug coverage. So many of the poorest of the poor elderly already have that benefit, as do most elderly with employer retirement benefits or Medigap coverage.

What I think is odd is that the proposal's Options 2 and 3 use more extensive drug coverage as the carrot for seniors to enroll in private managed-care plans. For quite a number of years the Medicare program has allowed elderly beneficiaries to enroll in HMOs that have offered comprehensive drug coverage. More recently, under the Medicare+Choice plans, the elderly have had access to a broader array of private health plans, similar to what the administration proposes. There is nothing new in this. And I think most people are aware, that while the HMOs initially made money off the elderly beneficiaries that enrolled in them - because at first the healthiest of the elderly were more likely to enroll - as the enrollment in those HMOs began to more broadly resemble the entire Medicare population and the population grew and aged, the HMOs were no longer making money on them. In fact they felt they were losing money, and many HMOs have stopped participating in the Medicare program entirely.

'If the incentive under the Bush proposal was to get more elderly into nonprofit, organized-delivery systems like the Kaiser model, I think that would be a fabulous step forward. It is the best way to deliver medical care. But few elderly beneficiaries will have the opportunity to select that option.'
The for-profit incentive is relatively new. In the early '60s, when Medicare was developed, most working people with employer-based coverage were covered by statewide nonprofit, fee-for-service plans like Blue Cross/Blue Shield. There were also other large insurance companies that were for profit, like Prudential and Aetna, which were competing to cover employed groups. Now almost all health plans are for-profit, and their fundamental mission is a return on equity to shareholders, not to provide the best health care with the dollars that they have available. That's of great concern to me. I think to shift more elderly people into a for-profit medical care system is the wrong direction. We should be improving the traditional Medicare program.

According to the AARP, 217,000 Medicare beneficiaries were dropped by their HMOs at the end of 2002 as the plans withdrew from Medicare+Choice program.

Yes. So it seems strange to me that the Bush administration's Medicare proposal looks to managed care as the solution to the Medicare problem - when a growing number of private managed-care plans have indicated that unless or until the government's Medicare payments enable them to make money off the elderly population, they're not interested in enrolling them. The only way they'll be interested is if the federal government increases the Medicare payment to health plans for each elderly beneficiary. And I haven't seen anything that suggests that the administration is going to do that.

Isn't Medicare pretty efficient at delivering its services?

It's unbelievably efficient! Its administrative costs are around 3 percent compared to 20 percent to 30 percent for for-profit plans. A health plan like Kaiser, which is a fully integrated, organized-delivery system, also has relatively low administrative costs, maybe 5 percent. In contrast, a lot of the private health insurers that contract with individual physicians and pay for each service they provide have much higher administrative costs. They also spend part of each premium on marketing and ensuring a return on equity to shareholders. If we're using federal tax dollars to finance medical care for the elderly, it seems to me that we should be maximizing the amount of those dollars that go to health services, rather than to support for-profit corporations and inefficient administrative structures.

Will managed-care plans offer more choices, as President Bush argues?

One of the reasons many elderly Medicare beneficiaries transitioned into the HMOs was to get the more comprehensive preventive care and drug coverage. But in the process of getting that, what they gave up was a wide choice of physicians. Pretty much every physician in the country participates in the Medicare program, while a growing number of physicians don't want to participate in HMOs. Right now, if you're in the Medicare program, you can practically go to any doctor or hospital in the country and be covered for your care there. When you enter an HMO, you're restricted - especially in the California model of managed care - to only those physicians that belong to the medical group that you choose within that HMO. You don't even have access to all the doctors who are part of that HMO. So this extremely limits access and choice at the provider level - it does not increase it. Although the Bush plan increases choices of health plans, it at the same time reduces the choice of where you can get your care and from whom.

It sounds like you see a lot of problems with managed care.

Managed care, HMOs in particular, have not done very well in meeting the needs of the elderly.

Again, it helps to look at how HMOs developed. Traditional HMOs were intended to provide a lot of preventive and primary care up front in an effort to maintain the health of workers. The idea was to offer comprehensive, integrated care within a fixed budget. The first HMOs were established in the late 1930s by Henry J. Kaiser with Dr. Sidney Garfield to cover Kaiser dam builders and ship workers and their young families. They opened for enrollment to the community in 1945. They weren't designed to take care of the elderly's needs, particularly their functional limitations and chronic illness. Rather than trying to fit the square peg into the round hole, we need to get rid of the round holes. Medicare is a great program. Its benefit package simply needs to be updated. Again, the Bush Administration is moving us in the wrong direction.

'Rather than trying to fit the square peg into the round hole, we need to get rid of the round holes. Medicare is a great program. Its benefit package simply needs to be updated.'

In 1973 when Nixon signed the HMO Act [which provided funding for planning grants to establish enough HMOs so that 80 percent of the U.S. population could be in an HMO by 1980], the desirable model for HMOs really was Kaiser's and the Group Health Cooperative model of fully integrated delivery systems for services that are prepaid. These models had shown that they could offer very comprehensive care, much better coordinated than in the pay as you go, fee-for-service program and at a lower cost.

But for a company that wanted to develop a new HMO, the initial capital costs to start a group or staff-model HMO like Kaiser's were too high. Instead they created a version of HMOs that no one had ever initially imagined: the Independent Practice Associations (IPAs), or network-model HMOs (such as California Care and HealthNet), where large numbers of solo practitioners or physicians practicing in groups contract with the many different IPAs, which then contract with the health insurer to provide prepaid services. Unlike the Kaiser model, where the doctors take care only of Kaiser patients, in the IPA/PPO world, doctors are taking care of patients from many, many different health plans, which all have different rules, co-payments, administrative requirements, etc. The administrative burden on providers is enormous. And as a result no plan really has much influence on what a physician or a physician organization will do, because that influence is fragmented across so many different health insurers. So most HMOs don't function in any way like an organized delivery system like Kaiser, where the insurer and doctors are working exclusively on providing heath care to a given population using one set of benefits, rules and administrative processes.

If the incentive under the Bush proposal was to get more elderly into nonprofit, organized-delivery systems, I think that would be a fabulous step forward. It is the best way to deliver medical care. But unfortunately, since there are so very few of those plans left, few elderly beneficiaries will be able to select that option.

The president said his framework "stands in stark contrast to the government-run health care ideas; the ideas in which the federal government decides care, the federal government rations care, the federal government dictates coverage - a vision which, in my judgment, will stifle innovation, stifle quality, and run up the costs on the patients of America." Has Medicare truly stifled innovation and quality while running up costs?

Not at all. In fact I would say it's been the opposite. Much of the training and money that teaching hospitals have for research has been funded by Medicare under the traditional Medicare fee-for-service model. In fact many people would argue that managed care has completely undercut the ability of the Medicare program to subsidize new research and training for physicians and has hurt the country's teaching hospitals.

President Bush has said the plan will probably cost an additional $400 billion over the next 10 years. Does that figure sound reasonable to you?

I've seen numbers that range up to double that. We never know precisely what the costs of a program like this will be. History suggests that we always underestimate how much it's going to cost - always. My guess is that it's somewhere between $400 billion and $800 billion. And as the program has been proposed, a significant portion of that will go into the pockets of private, for-profit health plans, rather than to pay for the costs of drugs and services.

What kind of Medicare reforms would you like to see instead?

What would make much more sense to me is for the federal government to purchase drugs for the elderly using what's called the Federal Supply Schedule. That would enable the government to buy drugs directly at a substantial discount, with savings as much as 30 percent, and make them available to the 24 percent of the elderly without drug coverage through Medicare. It would cost the government much less, the dollars would go much further, and it would be able to provide more comprehensive coverage to more people. This option is fully available to the administration. But the drug companies don't like it, of course, as their profits would be reduced under such a scheme.

As for controlling out-of-pocket costs due to hospitalization and catastrophic expenses, only about 10 percent of the elderly population will experience very high costs in any one year. The way that some private plans address this is to set a cap for what your out-of-pocket payment is, and then they have some sort of stop-loss protection beyond that. To go back to the intention of the original program - to give the elderly coverage that resembles what working-age people have - I think the administration should be looking at the private health plans for ideas of how to redesign the benefits of the Medicare program, which has worked well for the last 35 years. Not handing Medicare over to them.